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Monday, July 23, 2012

Sec- 44AD - Computing profits & gains of business on presumptive basis

Sec-44AD - Computing profits and gains of business on presumptive basis

... a deemed provision

Section 44 AD of the Income Tax Act, 1961 was meant for computing profits and gains of business of civil construction, etc.

Note, that sec-44AD is a deemed provision under the said Act.

Application and scope of the section:

The said section was brought into by the Tax Reforms Committee that has recommended this method of computing income under the head "Profits and gains of business or profession" in certain areas in order to facilitate the better tax compliance. 

(Refer CBDT Circular No. 684 dated 10th June, 1994)

It was observed that the scheme would enable small assessee to pay tax on their income without getting involved in the system of maintenance of record. 

The scheme was introduced from Assessment Year 1994-95.

In this method of assessment, there is an option for an assessee to declare its income at minimum rate of 8% of the gross receipts, paid or payable, or a sum higher than the aforesaid sum as declared by the assessee, in the previous year.

However, the scheme is optional. Hence, an assessee can claim his income to be less than the deemed rate, i.e. @8 %, subject to fulfillment of certain conditions and proper compliances.

Compliances:

ü       Maintain the books of account and other documents as required under section 44AA

ü      Get the books of accounts audited under section 44AB

Now, at the very outset, The Finance (No. 2) Act, 2009 has expanded the scope of this section beyond the assessee who is engaged in business of civil construction, excluding Limited Liability Partnership (LLP) firm from its scope.

For the purpose of this section 44AD the scope has been widened to include ANY business except the business of plying, hiring, or leasing goods carriages referred to in sec-44AE and therefore one can take the option to assess its tax chargeable at presumptive rates with turnover of less than Rs. 40 lakh.

In view of the above, one can very well declare its income at 8% of gross receipts, as the section is now applicable to ANY business and not only confide to trading business.

Further, for the purpose of presumptive taxation under this section, the Finance Act, 2010 has amended to increase threshold limit of total turnover and gross receipts from 40 lakh rupees to sixty lakh rupees. The same is applicable w.e.f. 01-04.2011.

Therefore, the provisions of the new Section will be applicable if the following conditions are satisfied:

a)  Assessee eligible for the purpose of this Section has to be an Individual/a HUF/a Partnership Firm (not being a LLP);

b) The assessee has not claimed any deduction u/s.10A, 10AA, 10B, 10BA, and 80HH to 80RRB in the relevant Assessment Year;

c)  Total Turnover/ Gross Receipt of the Assessee in the previous year should being Rs. 60.00 lakhs.

Under the erstwhile section of sec-44AD and sec44 AF, the assessees had an option to declare the presumptive income arising from the respective business calculated at a percentage lesser than the minimum specified, subject to the condition that books of accounts u/s. 44AA should that be maintained and thereof getting the same audited u/s. 44AB.

However, under the new section which has been inserted vide Finance Act, 2010, the “eligible assessee” vide sec-44AD (5) shall be required to maintain books of accounts under the following two conditions: -

a)  if the presumptive income offered for taxation is less than 8% of the gross receipts or total turnover;
b)  if the “total income” exceeds the maximum amount not chargeable to income tax

“Total income” as generally understood means gross total income less deductions under chapter-VI A (sec-80C & 80U) of the Act, WITHOUT INCLUDING PROFITS OF ELIGIBLE BUSINESS.

Further, this provision does not require the assessee to comply with the provisions relating to advance tax.

Consequences of this special provision: 

(i)  The deduction under section 30 to 38 shall be presumed to have been already given full effect, and therefore no further deduction shall be allowed under this section;

(ii)  The WDV of the assets used in the eligible business shall be deemed to have calculated as if the eligible assessee had been allowed the deduction of the depreciation for each of such assessment years.

(iii) The salary and interest to partners are still allowable subject to the limits prescribed under section 40(b).

Conclusion:

The very objective of presumptive scheme of taxation is to enable a small contractor to file return of income without having to maintain cumbersome record.

… xxx…

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